NBFC troubles far from over; loans fall 31% in Q4

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Updated: June 27, 2019 5:37:10 PM

The total credit disbursed by NBFCs for the quarter ended March 2019 fell by nearly 31% year-on-year (y-o-y) to Rs 1.96 lakh crore.

loan,nbfc, mutual fundMutual fund exposures fell by 16.8% to Rs 60,406 crore in May since January.

Worries for non-banking financial companies (NBFCs) may be far from over as the sector continues to face a severe liquidity crunch amid a loss of investor confidence and higher funding costs on account of unexpected defaults, leading to fall in credit disbursals from the sector.

The total credit disbursed by NBFCs for the quarter ended March 2019 fell by nearly 31% year-on-year (y-o-y) to Rs 1.96 lakh crore, according to data published by Finance Industry Development Council (FIDC). “It is high time regulators, bankers, funders and investors take note of this and work out quick remedial measures for well-run asset and loan financing NBFCs in sectors such as automobiles, MSME and retail,” said Mahesh Thakkar, director-general, FIDC.

NBFCs had resorted to issuing non-convertible debentures (NCDs) at a higher cost for their funding requirements in March and April as commercial banks and mutual funds subdued lending to the troubled sector. The long-term funding from mutual funds towards NBFCs have been constantly falling since January this year. Mutual fund exposures fell by 16.8% to Rs 60,406 crore in May since January. “NBFCs currently are in need of long-term funds which mutual funds as of now are not willing to lend as they are still cautious and are willing to lend to NBFCs only with a strong balance sheet and robust promoter backing,” said Mahendra Jajoo, head of fixed income at Mirae Asset Global.

However, the cost of raising funds for top-rated NBFCs dipped in May as spreads for five-year paper of AAA-rated NBFCs dropped to 102 basis points (bps), the lowest since October 2018. Dealers believe there was a moderation in spreads on account of higher foreign fund flows into liquid funds in May. “There were inflows worth Rs 90,000 crore in liquid funds in May,”said a dealer. Bond dealers also said there was a fall in spreads as there was a higher demand for government-owned NBFCs while private lenders still faced funding problems.

The cost of raising funds from banks remain higher as commercial banks have not been able to transfer the benefit of the rate cuts to its lenders. Treasurers believe a slowdown in deposit growth of lower than 10% against a 13% credit growth is the major reason as to why banks are not able to pass on the benefit of rate cuts. “The main issue for lack of transmission is higher advances growth as against a slowing deposit growth,” said Kamal Mahajan, head-treasury and global markets, Bank of Baroda.

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